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Executives

Mark Lemond - President & Chief Executive Officer

Kerry Jackson - Chief Financial Officer

Cliff Sifford - Executive Vice President and General Merchandise Manager

Tim Baker - Senior Vice President & Operations Manager

Analysts

Sam Poser - Sterne, Agee

Barry Sosnick - Gilford Securities

Bernard Sosnick - Oppenheimer

Jeff Stein - Soleil Securities

Chris Svezia - Susquehanna Financial Group

Jill Caruthers - Johnson Rice

Heather Boksen - Sidoti & Co.

Shawn Boyd - Westcliff Capital Management

David Turner - Avondale Partners

Russ Solestrie - Unidentified Company

Sam Poser - Sterne, Agee

Shoe Carnival Inc. (SCVL) Q2 2009 Earnings Call August 27, 2009 2:00 PM ET

Operator

Good afternoon ladies and gentlemen and welcome to Shoe Carnival’s fiscal year 2009 second quarter earnings conference call. Today’s call is being recorded and is also being broadcast via live webcast. Any reproduction or rebroadcast of any portion of this call is expressly prohibited.

This conference may contain forward-looking statements that involve a number of risk factors. These risk factors could cause the company’s actual results to be materially different from those projected in such statements. These forward-looking statements should be considered in conjunction with the discussion of risk factors included in the company’s SEC filings and today’s press release.

Investors are cautioned not to place undue reliance on these forward-looking statements which speak only has of today’s date. The company disclaims any obligation to update any of the risk factors or to publicly announce any revisions to the forward-looking statements talked about during this conference call or contained in today’s press release to reflect future events or developments.

I will now turn the call over to Mr. Mark Lemond, President and Chief Executive Officer of Shoe Carnival for opening comments. Mr. Lemond, please begin.

Mark Lemond

Thank you and welcome to Shoe Carnival’s second quarter fiscal 2009 earnings conference call. Joining me on the call today are Kerry Jackson, our Chief Financial Officer, Cliff Sifford, Executive Vice President and General Merchandise Manager and Tim Baker, Senior Vice President and Operations Manager.

We are pleased to report that Shoe Carnival met or exceeded the majority of our internal goals for the second quarter of 2009. While customer spending and the overall economic environment remained challenging in the second quarter, we were able to improve our year-over-year gross and operating margins and therefore record earnings per share equal to last year.

Our results demonstrate the strength of our business model and our ability to effectively manage the controllable aspects of our business; particularly operating expenses, inventory and our marketing and merchandise strategies. We are very pleased that our back-to-school sales season has been much better than anticipated to date especially in those markets where schools have reconvened.

I’ll provide more detail about our future outlook in a few moments. Now, focusing on our second quarter, as anticipated net sales were lower in the second quarter of 2009 compared to the prior year period due to the decline in customer traffic. Comparable store sales were down 6.4% which was inline with our expectations for a mid-single digit decline.

As we expected customer traffic in the second quarter was negatively impacted by several factors compared to the same period last year. First, a shift in the retail calendar moved the majority of sales-tax-free holidays from the end of the second quarter in fiscal 2008 into the third quarter in fiscal 2009; let me explain that a little further. This year only 19 stores are in states where tax-free days fell in our fiscal second quarter.

Compare that to 2008 when 121 stores were located in states with tax-free days that fell in the second quarter. In addition, government stimulus checks were received by consumers during the second quarter of 2008, which we believe had a positive effect on sales last year. As you know this particular stimulus effort was not repeated in 2009. In the second quarter 2009 our gross profit margin increased to 26.8% as compared to 26.6% in the same period last year.

Our ability to clear through inventory in the first quarter of 2009 positioned us well for the second quarter with a very clean product assortment. As a result promotional and clearance activities were inline with our expectations. Importantly although we saw a decrease in transactions due to the decline in consumer traffic, we realized an increase of about 6% in the average price per pair Shoe.

This strategy of continuing to raise the net realized price of our footwear is particularly significant as we enter the back-to-school sales period and athletic footwear becomes much more important. In addition to the improved gross profit margin we effectively controlled selling general and administrative expenses resulting in savings of $1.7 million in the second quarter of 2009, as compared to the prior year.

Our store level distribution center and Administrative Management Groups did an excellent job controlling costs, despite opening two new stores in the quarter and operating 11 more stores than in the same period last year and finally, we continue to improve our balance sheet over the prior year period. Our cash position increased to $17.7 million and we remain free of interest bearing debt at the end of the second quarter of 2009.

Part of our strategy to mitigate the impact from the downturn in the economy has been to shrink our average per store inventories. We reversed that strategy in the second quarter. While we ended the quarter with overall average inventories about flat compared to last year, we decreased the amount of inventory held in reserve in our distribution center and increased by an average of 6% the amount of inventory actually in the stores.

We feel this increase in inventory is one of the keys to our current success during the back-to-school sales period and will enable us to maximize our business in the remainder of the third quarter. We also believe our strong unleveraged financial position leaves us well positioned for additional square footage growth over the next several years.

For 2009, we still plan to open approximately 16 stores, two of which celebrated grand openings on August 1 with the final four openings scheduled for the third quarter. 14 of the 16 new store openings will fill in existing markets. We closed one store in the second quarter and we’ll close six additional stores in the second half of 2009.

The majority of the costs involved to close these stores were recorded in prior periods when we made the decision to close these specific locations. We will continue to review our annual store growth rate based on our view of the internal and external opportunities and challenges in the marketplace. At the end of the second quarter we operated 314 stores in between states.

We feel very confident in our position as we enter the back half of 2009. During this challenging economic environment associates in our stores, and the distribution center and at our company headquarters are focused on delivering an in store experience that separates us from our competitors. We think there are certain key elements of our overall strategy that accomplish exactly that.

A few of them that we believe are particularly important in today’s retail environment are, number one, providing a full assortment of family footwear at prices our customers can afford. Number two, maintaining a stronger focus on children’s product and sizes than our competitors. Number three, shifting our product mix to include a broader and deeper selection of athletic footwear and, number four, implementing creative in store visual elements that highlight key product styles and the hottest brands.

Now let me speak briefly about the back-to-school season. We are seeing greatly improved sales trends in August, especially for stores where schools have reconvened. Comparable store sales thus far in August are up approximately 11%. Only about 5% of that 11% increase is due to the shift of sales-tax-free holidays out of fiscal July and into fiscal August.

While there’s considerable uncertainty regarding consumer discretionary spending after back-to-school, we remain optimistic about the sales trends for the remainder of the quarter. Therefore due to these improved trends early in the third quarter, we expect to record positive comparable store sales for the first time in the last 12 quarters.

Customers are responding well to our marking efforts, in store promotional activities in both our athletic and non-athletic product assortments. We believe that when customers have a reason or need to shop like during the back-to-school season combined with the right incentives to buy they are looking to Shoe Carnival for the value proposition they demand.

We are very pleased with our inventory levels and we believe our current merchandise assortment has us well positioned for the last two weeks of back-to-school and the remainder of the third quarter. We are confident that our business model of providing the right product assortment for the entire family at a compelling value and in a fun shopping environment will continue to set us apart in this challenging economic environment.

Our management team has been a many economic cycles and we will continue to conservatively manage the controllable aspects of our business until we have better clarity with respect to a sustained economic recovery. We remain intently focused on profitable operations, cash generation and gaining long term market share.

Now, I’d like to turn the call over to Cliff Sifford for a few more details on our merchandise.

Shoe Carnival

Thank you, Mark. As Mark stated, our total comparable store sales were down 6.4% for the second quarter as traffic was down 6.1%. On a positive note, our average unit retail in footwear was up 6.2%. We recorded losses in every department as our customer had less disposable income due to lack of consumer stimulus checks compared to the prior year. This economic downturn has taught us that the customer will spend when there is a need or when dollars are available as she did in February with rapid refund.

I’d like to share with you a recap by department of our second quarter sales and would then like to take you through the current back-to-school sales trends. Our women’s non-athletic department, our sales ended the quarter down mid-single digit. However, we have been pleased with the positive results within our women’s sandal category as Gladiators, sports sandals and Thongs continue to sell well. Unfortunately, the strong performance of Sandals was not enough to overcome the disappointing performance of dress shoes, low profile and traditional flats.

As we reported on our last call, our buyers did a very good job of clearing through the last of the fall carryover during the first quarter. This allowed for margin increase of 110 basis points in our women’s non-athletic department. Our men’s non-athletic department, our comparable store sales were down mid-single digits for the quarter. As we recorded on last call, we continue to see a move to more traditional classifications such as comfort dress shoes, boat shoes and soccer slides, here just as in women’s we have seen a continuing slowdown of low profile casuals.

Margins in this department remain relatively flat for the quarter as average unit retails climb 2.8%. The children’s combined business also ended the quarter down mid-single digits. The children’s athletic business was down low single digits while the children’s non-athletic business was down high single digits. The children’s non-athletic loss was primarily due to our exiting the molded footwear business from the second quarter prior year period.

Since molded footwear was a low margin business, our margins in children’s non-athletic ended the quarter up 200 basis points; in children’s athletic, losses were driven by boys Skate and basketball as well as girls classic. On a positive note, Converse Chuck, boys running and fashion athletic from Nike all showed strong sales. In adult athletics, comparable store sales were down mid single digits for the quarter. Losses were primarily from the classic categories, fashion low profile, men’s basketball and Skate.

We were pleased with the performance of several key classifications such as Converse Chucks, urban fashion styles from Nike along with a running category for both men and women. Now I’d like to give you some incite into the exciting things that we’ve seen happen for back-to-school.

For the month of August, we’ve experienced comparable store sales increases in every department. Our non-athletic departments are reporting mid single digit increases while athletic departments are up double digit. Key items are coming from brands like Sperry, Blowfish, Nike, Converse and Puma. Key categories include women’s boots, junior’s flats, women’s and men’s boat shoes, children’s and adults Chuck, children’s Skates and adult fashion athletic.

As Mark stated, we have completed all tax-free holidays and as of today 90% of our markets have gone back-to-school. The trends over the past several years, as the customer gets back-to-school, sees what is hot and then decides to buy. This year not only did the customer shop early, but our sales in stores have already gone back-to-school have continued to be strong. Now let me add some color as to what we believe is driving these increases.

As where he said on our last call, we believe that in challenging economic time periods buying habit shift from want to need. We believe that back-to-school is a time of need and we definitely experience this as we entered the season. Our merchants did a great job of shifting purchases into key categories for this time period. We planned our inventories on a store to store basis up from a year ago, concentrating on buying depth in key items and classifications. We put together an all-encompassing marketing campaign that included print, electronic media and digital.

We are very excited about our entry into the digital space as it gives us more access at a younger consumer. One of the strategies we executed was the creation of a Facebook page, where customers can opt-in to follow us as a fan of Shoe Carnival. We keep our fans updated on the latest ads or special events going on during any particular week. We set this page up less than four weeks ago and to date we have already registered over 10,000 fans. We are pleased with the customer response to this new marketing strategy.

In closing we are very pleased with the strong performance for back-to-school. I’d again like to call out our merchants, store operations and the distribution teams who all did an outstanding job in getting trends right merchandise in the stores for this all important season.

Also our marketing staff did a great job in putting together a campaign that was memorable and exciting. We feel that our campaign set us apart from our competition and drove customers to our stores. As we move through fall we hope to build on these successes as we execute our holiday campaign.

Now, I’d like to turn the call over to Kerry Jackson.

Kerry Jackson

Thank you, Cliff. Let me begin by discussing results for the second quarter and first six months followed by information on cash flows and ending with certain expected financial metrics for Q3 and the full year. Our net sales for the second quarter decreased $5.7 million to $152.8 million compared to $158.5 million for the second quarter of 2008.

The decrease in sales resulted from a decline in comparable store sales of 6.4%. In addition to a loss of sales from the stores close since the ends of second quarter of last year. This decrease was partially offset by an $8.1 million increase in sales generated by new stores opened since the second quarter of 2008. Of the total comp store sales decline for the quarter about 2% of the decline we’re attributed to the shift in sales tax-free holidays then Mark discussed in his remarks.

Gross margins for the second quarter of 2009 increased 0.2% over the same period last year to 26.8%, an increase of 0.4% in the merchandise margin was partially offset by 0.2% increase in buying distribution occupancy costs as a percent of sales. As discussed earlier the merchandise margin benefit from entering the second quarter with substantially less clearance product in our inventories.

Despite incurring less buying distribution occupancy expense during the quarter, compared with second quarter last year, we deleverage these expenses by 0.2% due to lower sales for the quarter. We were able to decrease our selling general and administrative expenses $1.7 million or 0.1% as a percent of sales, despite operating additional 11 stores at the end of the second quarter as compared to the prior year.

Approximately 30% of the savings in SG&A for the quarter was due to incurring less advertising expense. We shifted advertising from July and into August to correspond with the shift in sales for tax-free holidays and the later back-to-school dates. Store closing costs included in SG&A for the second quarter decreased to $132,000 or 0.1% of sales as compared to $300,000 or 0.2% of sales for the second quarter last year.

Pre-opening costs for the second quarter decreased to $153,000 or 0.1% of sales compared to $406,000 or 0.3% of sales in the same period last year. We opened two stores in Q2 for the current year as compared to 12 stores in Q2 last year. The remaining expense savings are spread across many categories and are a result of tight expense controls by our associates.

Operating income for the quarter was $1.9 million compared with $1.5 million in Q2 last year. Our effective income tax rate for the second quarter was 47.3% as compared to 34.3% for the second quarter last year. Included in this years Q2 expense were state tax audit adjustments which caused the rate to increase compared to the prior year. We continue to expect the annual income tax rate of approximately 39%.

Net income for the quarter was $982,000 compared to net income of $977,000 in Q2 last year. Diluted EPS was $0.08 for both Q2 this year and last year. Now transition to year-to-date results our net sales for the first half of 2009 decreased $490,000 to $320.1 million compared to $320.6 million for the first half of 2008.

The decrease in sales resulted from a decline in comparable store sales of 3.3%, in addition to a loss of sales from the stores close since the beginning of fiscal 2008. This decrease was almost completely offset by $17.3 million increase in sales generated by new stores opened since the beginning of fiscal 2008.

Gross margins for the first six months of 2009 decreased 0.4% over the same period last year to 27.4%. The merchandise margin decreased 0.4%, while buying distribution occupancy costs remain flat as a percentage of sales. SG&A expense decreased $908,000 for the year-to-date period and as a percentage of sales decreased 0.2%.

Store closing costs included in SG&A decreased $240,000 to $262,000 in the first half of 2009. Pre-opening costs increased $194,000 for the first half of 2009 to $634,000. Net income was $5.1 million, compared to net income of $5.8 million last year. Diluted EPS for the first half of the year decreased to $0.41 as compared to $0.46 in the prior year period.

Now, let me discuss information effecting cash flows. Capital expenditures for the first half of 2009 were $5.5 million, of which $3.6 million was for new stores. We continue to expect total capital expenditures in fiscal 2009 to be between $10 million and $12 million. Lease incentives received from landlords are expected to be approximately $1.9 million.

Depreciation expense for Q2 was $3.7 million and $7.6 million for the first six months. For the full year, depreciation expected to be approximately $15 million. My final comments today are on certain financial metrics for Q3, 2009. As Mark said earlier, given the strength of our sales so far in August, we feel that we can achieve positive comp store sales in Q3. We anticipate this increase should be in the range of low-single digits to mid-single digits.

The shift in tax-free holidays from Q2 will be a benefit to our Q3 comp store sales for the full quarter by about 2%. In Q3 last year, comparable store sales declined 5%. With our inventories well controlled we expect a slight increase in our gross profit margin in Q3 this year, although increased promotional activity during the remainder of the quarter could impact this increase.

We will continue to control our SG&A expenses. With the expected increase in sales, we expect it to be able to slightly leverage our SG&A in Q3 this year. We will increase overall dollars spent in SG&A over Q3 of last year due to additional advertising and employee incentive program expense along with the cost of operating additional stores. Part of the increase in advertising is due to the shift in tax-free holidays.

This concludes our financial review for the second quarter. I’d now like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions)Your first question comes from Sam Poser - Sterne, Agee.

Sam Poser - Sterne, Agee

A question on the SG&A, how much of the SG&A is fixed versus variable in fixed costs,

Kerry?

Kerry Jackson

Sam, that’s a difficult question. We can adjust, if we can see perceive a sales trends coming down, we can adjust our expenses accordingly, we proved that in the past. However, if sale would be in a short term event then we have a difficult time adjusting our expense structure accordingly.

So we have a great deal flexibility, if we can see an opportunity coming. Now items like what we’re seeing in Q3, where we have a tax shift that benefited SG&A in Q2, whereas we incurred less advertising costs, but in Q3 we will incur more advertising cost. So there are certain elements out of our control just following the pattern of sales.

Sam Poser - Sterne, Agee

How should we look at the SG&A looking in the short term into Q3?

Kerry Jackson

Like I said, I think even though we’re going to incur more dollars in pure SG&A expense. We’re also incurred additional sales and we should be able to leverage the overall expense based on our expectation of higher sales.

Sam Poser - Sterne, Agee

You have an offset in the fourth quarter from last year, correct?

Kerry Jackson

We do. Last year, we took a charge for a store closing costs of about $2.4 million.

Sam Poser - Sterne, Agee

Then, Cliff just wanted to follow-up with you on some of the category. How is the wellness category shaping up for you so to speak?

Cliff Sifford

Sam, right now it’s one shoe or one style. We really don’t comment on a single category or style like that

Sam Poser - Sterne, Agee

I was told, I was allowed to ask about categories.

Cliff Sifford

I’m glad to talk to you about categories. In that category and one shoe and I’d just for competitive reasons, but now we’d rather or not talk about that one shoe.

Sam Poser - Sterne, Agee

Can you give us a little bit of color on the kids business and on where the action is there and where you see that going forward as well as you come to the boot business, is off to a good start and how you look at playing that to the balance of the year?

Cliff Sifford

Our kids business, anytime you’re on a recession kids business continues to be strong. We’ve seen that this year with the children’s business and for back-to-school. We’re continuing to see that, as I said in my prepared remarks.

We’re getting good traction out of our fashion athletic, which is really dominated by Nike, again good traction out of Skate especially in girls and then running as well. So it’s a little early yet for me to tell you that boots are going to be strong, although the early delivery we’ve gotten on boots. So far, we’ve seen some good sell through in kids. So we feel, we’re about to enter into a good boot market.

Sam Poser - Sterne, Agee

Lastly, Cliff, to what degree would you say is your assortment narrower than it was a year ago? I mean how much more focus has it gotten on a year-over-year basis?

Cliff Sifford

I don’t think it is narrower. We expanded our selection somewhat, especially in athletic, not only in styles, but in depth. We added color, which we felt we were probably a little lack in last year for back-to-school. We added some color to our assortment and obviously, we added depth and we think that might be the difference in and what we’re experiencing at retail.

Sam Poser - Sterne, Agee

Would that mean that like other business like women’s dress maybe was a cut, was made a lot narrower to allow for the depth and the breath of athletic?

Cliff Sifford

We absolutely shifted dollars out of the brown categories and into the athletic categories for back-to-school.

Sam Poser - Sterne, Agee

So you focus much more on the key items…?

Cliff Sifford

We’re not any different than anyone else. More than 65% of our business for August is athletics. So we shifted dollars out of the brown shoe business and then to athletic.

Operator

Your next question comes from Barry Sosnick - Gilford Securities.

Barry Sosnick - Gilford Securities

Actually looking at the numbers, particularly inventory turns. It’s hard to get an idea about where you’ve been turning the inventory, because of the high sales of stock ratio at the end of the quarter. Wanted to get an idea in terms of what you guys are looking at internally on inventory turns, Cliff.

Cliff Sifford

Actually our inventory turns will stay somewhat flat to last year. In fact, flat to last year. Really depends upon how sales trends as we go to the second half, but I will tell you that we are going to plan our inventories up at key time periods. We do believe that is key to our success at back-to-school is that the customers were able to find what they’re looking for. So as we go into holiday, we’ll increase our inventory a little over last year in hopes of generating additional sales, which should not affect turn in anyway.

Barry Sosnick - Gilford Securities

Turns were up for the second quarter, because again [Multiple Speakers]

Cliff Sifford

Turns were relatively flat to last year.

Barry Sosnick - Gilford Securities

In terms of the shift of the inventory from the distribution center out to the stores, how much of that was related to the upgrade in the distribution center, which of course is segue to getting some update in terms of how that’s progressing?

Tim Baker

I’ll let Mark could address the distribution center, but I can tell you that none of that shift into the stores was because of the upgrade. That was a strategic decision that we made; not to count on fill ins, but if back-to-school is such a concentrated short period of time, that if you count on refilling the stores once the back-to-school season starts in the storage, you can’t get the product in fast enough, so what we do is we anticipated the need prior to school and we put the product in the stores in greater depth than we did a year ago and greater assortment than we did a year ago and that way when the customers came in they were not disappointed.

Barry Sosnick - Gilford Securities

As far as the update on the distribution center?

Mark Lemond

We have just prior to back-to-school went through and up grated the software and replaced all the existing software in the DC with a new set of software and that software is working very well. It was a very uneventful conversion. Later this during the fall we will be upgrading certain pieces of the conveyor systems. We expect again that not to be an issue where it will effect operations. We’ll work around those upgrades around the need to get product to the stores.

Operator

Your next question comes from Bernard Sosnick - Oppenheimer.

Bernard Sosnick - Oppenheimer

I just wanted to focus a little bit on the overhang of inventory apparently at the manufactures level due to difficulties from other retailers. Do you foresee opportunistic buys coming your way that could be helpful in the second half of the year?

Kerry Jackson

We have not seen great increase in opportunistic buys as every year and every season we do we are made privities some of those buys, but as of today I haven’t seen a great increase in that year-over-year.

Bernard Sosnick - Oppenheimer

When I’m also kind of interested in what your experience has been at time in the past when other athletic footwear retailers have had difficulty has it resulted in more promotional activity shifting down to Shoe Carnival?

Kerry Jackson

Actually with the most of the key vendors now have their own outlet stores and as product is cancelled off they normally take that product into their own stores. So, we have not seen an increase in promotional activity due to the difficult environment. As I said every quarter or every year there are closeouts made available to us. We just have not seen a great increase in that activity over the past year.

Bernard Sosnick - Oppenheimer

Finally, based on what you said about the early August sales. Sales are running better than you expected your inventory is turning better than expected moving out faster. Why did you reference the possibility of an increase in promotions later in the third quarter?

Mark Lemond

I don’t know that we did but if someone did mention that there’s a possibility of an increase in promotions it would be in reaction to what our competitors do throughout the remainder, not only the third quarter, but as we going to the fourth quarter as well. Bernard as you well no we have the capability in-store to be very reactionary to what our competitive set does.

Either through the advertise Medias or mediums or with regard to whatever kind of promotions that they run. So that’s what we generally speak of as we have, not a rigid but have a set promotional calendar and we can very rapidly react both within the Media and more particularly inside our stores to what our competitors do on a promotional activity level.

Bernard Sosnick - Oppenheimer

You made it very clear that your success so far is due to a better differentiated assortment so good luck in the months ahead. Thank you.

Operator

Your next question comes from Jeff Stein - Soleil Securities.

Jeff Stein - Soleil Securities

Change direction for a moment here. Can you bring us up to date, Mark and Kerry, on your store closing plans for the balance of the year? You mentioned six and for some reason in my model I have eight for the back half of the year. Am I just wrong or have you reduced the number of plan closing in the back half?

Mark Lemond

We’re planning on eight for the full year, Jeff. So I don’t know if there was confusion regarding the back half or versus the full year. I’m not sure without looking at which particular stores are, without trying to reconcile your number and our number, where the difference lies, but we are planning right now on eight store closures for the full fiscal year of 2009 and I believe two of those have closed, so we’ve six in the back half.

Jeff Stein - Soleil Securities

Okay, so 16 openings and eight closings?

Mark Lemond

That’s correct.

Jeff Stein - Soleil Securities

Any thoughts at this point about next year, I would think you’ve got to be thinking about what you’re going to do in 2010.

Kerry Jackson

I would tell you that as of right now, the openings and closings are probably not too much different than fiscal 2009. We probably have a few less stores that are scheduled to be closed, but I would expect that new store openings will be in the range of 16 to 20 stores. Obviously, we’re working on quite a few more deals than that, but I would anticipate somewhere between 15 and 20 new stores for next year.

Jeff Stein - Soleil Securities

Wondering as you look at your August sales trend, you talked about classifications that are doing well, sounds like athletic, but any comment on performance by gender, men’s, women’s?

Mark Lemond

Jeff, the performance for back-to-school, athletic is about 65% of our total. The women’s and men’s business are both up, but they are up about mid-single digits, but the athletic business is up double digits. So they are picking up a little market share this month.

Jeff Stein - Soleil Securities

Can you talk about what levels of dollars of advertising were shifted from Q2 to Q3?

Kerry Jackson

We said it ends up being around $0.5 million.

Jeff Stein - Soleil Securities

At this point, what kind of comp store sales increase is necessary to leverage buying, distribution and occupancy?

Kerry Jackson

We’ve seen a great deal of volatility in our buying, distribution and occupancy as of late. Historically, the number is we would need 2% to 3% comp store sales increase to leverage that. If you look at our BD&O so far this year we’re basically flat on dollars spent.

We’ve initiated some programs that have saved us a significant amount in our distribution center and our freight to our stores and we’ve also found some cost savings by renegotiating some rent. So therefore we’re able keep the dollars flat. We expect to see here again and these are unusual times and we expect to have rather flattish buying, distribution and occupancy costs for the full year in dollars spent.

Jeff Stein - Soleil Securities

Despite the fact that your SG&A is going to be up in Q3, just kind of curious as we look ahead to fourth quarter, does it become more variable again, so potentially if we see sales begin to slip back you could potentially see a year-on-year decline in SG&A dollars?

Mark Lemond

Jeff, we will see a year-over-year decline. Again, part of the SG&A costs last fourth quarter consisted of that charge for closing stores, when we identified specifically the stores that we’re going to close.

In getting to the operational aspects of the fourth quarter this year versus the fourth quarter of last year, and versus a third quarter we’ve made a definitive decision not to cut labor in our stores in any significant way and that’s an overall riding statement. We feel that our labor costs are low enough and what we’re focused on right now is with all the associates at store level is creating additional sales through sales help in the aisles, fitting customers, etc.

So we are not focused on cutting labor as sales decline right now. So we won’t see any cost savings generated from labor and that’s besides occupancy cost and advertising, that’s the biggest cost we have at store level.

Kerry Jackson

Jeff, let me add some color about the Q3 total dollars spent. You have to go back last year, we saw that the economy was getting tough and we made a conscious decision in Q3 last year to significantly cut our advertising expense. We talked about it and so what you saw with overall SG&A was cut $1.2 million in Q3 last year over Q3 of ‘07.

So now what we have is a shift in dollars in Q3, rut on top of that we have a more traditional back-to-school spend of advertising and certain other expenses that came back on employ incentive programs, etc. So what I look at is Q3 spend, it looks like as larger than increase year-over-year is larger than it is only, because Q3 last year was aggressively cut.

Jeff Stein - Soleil Securities

Final question for Cliff, just kind of curious, Cliff, after the back-to-school rush is over, what do you think happens to top line? Once it goes for more need based to back to want based selling?

Cliff Sifford

Jeff, we believe that boots are going to be very strong this year. In fact, the early read we’ve gotten so far on boots and on junior flats and certain other junior categories we believe that we’re going to have a strong boot season. If weather cooperates, I hate to use that, but in October I think you have an opportunity to pick up top line.

Operator

Your next question comes from Chris Svezia - Susquehanna Financial Group.

Chris Svezia - Susquehanna Financial Group

A couple questions, first just a point of clarification, Mark you had mentioned that 90% or so your markets are back-to-school now. You said, sales given in some of those markets that have gone back, continue to trend positively. Is that what you said?

Mark Lemond

I think, Cliff probably said that but, yes, that’s true.

Chris Svezia - Susquehanna Financial Group

I guess just going off the prior question here, when you guys think about as you come through back-to-school and you get into September a little bit, I know the comparisons get very favorable for you guys.

Based on sort of your guidance that trends get a little bit more challenging when you make a reference to boots and what you’re doing there, do you have enough differentiation in product relative to the competition, broadly speaking? To maybe see opportunity for comps to be maybe not potentially as bad as you’re kind of indicating or not to see maybe the decline that’s potentially your guidance would assume?

Cliff Sifford

Chris, I’m not really sure how to answer that versus the competition. Here’s what I can tell you that we do at Shoe Carnivals. We merchandise our stores to the consumer that shops that store and we feel that we have a very strong fall package put together in women’s boots and men’s and kids non-athletic.

If we can continue with the traction in athletic and the boot sales think positively as they are today, then you know what, the top line is going to obviously be better. It just remains to be seen what happens after the customer goes back. There’s a need at back-to-school and once that need diminishes and it’s going to be interest to go see what happens.

We believe, again based on the fact that we’ve seen early performance on boots and early performance on flats and early performance on certain junior casual and dress shoes that and the men’s category that we have an opportunity to increase sales as we move through third quarter.

Chris Svezia - Susquehanna Financial Group

Just in the context of you’re obviously performing better than most generally speaking your peers as you’ve gone into back-to-school. So I guess, in the context that your athletic positioning seems to be performing as well as it is you’re obviously doing something incrementally different here.

I was just curious if in fact those trends carry into other categories to drive some differential as you go into the second half of the year assuming incremental will we get a little more promotional, a little more competitive. I guess that was the context of the question. Just as you look to the athletic components to the business and you’ve increased it as we’ve gone through this year.

I know it’s probably early, but as you think about next year early spring. Does athletic continue to grow, or do you think you’re starting to see some improvement in the non-athletic categories that is percentage of your business that slowly starts to increase outside of the seasonality?

Cliff Sifford

We believe we are in an athletic run right now and I think that’s going to continue on into the spring season.

Operator

Your next question comes from Jill Caruthers - Johnson Rice.

Jill Caruthers - Johnson Rice

If you could talk about know one of the categories shrink you mentioned was urban focused athletic shoes. If you can talk about maybe the performance of your urban stores versus kind of the less urban focused stores?

Cliff Sifford

I think it was maybe two year ago we talked about the fact that we were, the lack of product for our urban consumer from especially from our major athletic vendors and we work individually with each one of those vendors and we were able to get some product that we can put in our stores and we’ve seen improvement in those stores since the latter part of last year and for back-to-school we continue to see that improvement. In fact those stores are running with the company.

Jill Caruthers - Johnson Rice

Then if you can talk about the strength in your average selling price about 6% plus. Is it per certain category that’s driving that strength or is it clearly you have lower clearance in the stores so your regular price selling is greater.

Cliff Sifford

It’s a little of both in the women’s non-athletic and in the kids non-athletic along with even in men’s the average, well more so than kids and women’s the average price come in close we have less clearance and we are selling more regular price products. In athletic it’s really the mix of brands. When you’re selling the better brands the way we are selling better brands it has helped raise our average price.

Operator

Your next question comes from Heather Boksen - Sidoti & Co.

Heather Boksen - Sidoti & Co.

Most of my questions have been answered. I just was curious if you can give us a little more color everybody seems to be talking about good early boot read, what specifically are you guys scene there.

Cliff Sifford

Today we are seeing mainly in the junior boot category and it’s some fleece, some sweater, a little western, but it’s a good bit, it’s a lot like what we saw late in the season last year and just a continuation of those categories.

Heather Boksen - Sidoti & Co.

I guess my other question is with regards to cash and the plans for it anything out there besides just store development?

Mark Lemond

Right now all we are talking about is organic growth with Shoe Carnival stores.

Heather Boksen - Sidoti & Co.

No buybacks or dividends or anything like that.

Mark Lemond

Not at this point in time.

Heather Boksen - Sidoti & Co.

I’m assuming I know it’s early, but for next year it sounds like the store opening plans are similar to this year so should we be thinking CapEx next year like this?

Mark Lemond

It would be pretty close to the same until we see, like I said in my prepared remarks, until we see some clarity with respect to a more sustained economic recovery we will play store openings fairly conservative.

We’ll continue to focus on the stores that don’t yield or the capital returns that we expect and so everything is going to be played pretty close to invest. We will invest a little more money, but not significant dollars in remodeling certain stores next year, particularly as they come up for renewals. So, we may spend a little bit more money, but it’s not going to be a significant amount, certainly relative to our cash position.

Operator

Your next question comes from Shawn Boyd - Westcliff Capital Management.

Shawn Boyd - Westcliff Capital Management

I had a couple of clarifications. In the call you mentioned the ASPs at 6%, was that on the July quarter or the comp to date in August?

Mark Lemond

I’m sorry, which 6% we’re you referring to?

Shawn Boyd - Westcliff Capital Management

The average selling price.

Cliff Sifford

That was for the second quarter.

Shawn Boyd - Westcliff Capital Management

That was for second quarter and can you give us for August to date?

Mark Lemond

Don’t have that number off the top of our heads. We can talk about that on our third quarter conference call though.

Shawn Boyd - Westcliff Capital Management

Just a little further on this, can you give us a rough range of what is the high and low on selling prices for your shoes and what’s the average right now?

Cliff Sifford

It really depends upon what category you’re speaking of, because we cover every category. We’re very strong kids reseller and obviously we’re in every category of men’s and women’s footwear. So I mean let me just say this, we carry athletic shoes up to $129 and we start at kids pricing, so from kids pricing up to $129.

Shawn Boyd - Westcliff Capital Management

When you have a product at the higher ends of that range, that starts to come into the next year is it at a similar gross margin percentage such that it’s generating a higher amount of gross margin dollars per unit sold or would it be a lower gross margin percentage?

Cliff Sifford

It’s the same. It all depends upon how well you buy. If you buy shoes that the customer wants at a higher retail price is in, it’s going to pay the price if you don’t then obviously the margins are lower.

Mark Lemond

I will add this. A lot of the product that we have at the higher end of that range is proven product within our stores. We don’t typically, we’ll take too many chances that that kind of price points on seasonal product or fashion forward product. So most of the products that we have at that above $100 range or even at the $100 range is really proven product within our products.

Shawn Boyd - Westcliff Capital Management

One last clarification if I may. The comp to-date at 11%, we need to look at that as having a five percentage point impact with the shift on the tax-free holiday sales. The comp that you are guiding to for the quarter is low to mid-single digits and you expect about a three percentage points impact to that?

Kerry Jackson

Two percentage points, it was about a 2% detriment to Q2 and it’s about a 2% benefit to Q3 from those tax-free shifts.

Operator

Your next question comes from David Turner - Avondale Partners.

David Turner - Avondale Partners

I too curious about the ASP trends quarter to-date and maybe you don’t want to answer which is fine, but I guess maybe I didn’t read between the lines well enough, without being specific. Do you get the sense that it’s more traffic coming back into the stores or is the strong start to Q3 more of ASP improvement as well?

Kerry Jackson

David, the average selling price is the next realized average selling price is up. I don’t want to get into specifics intra quarter on exactly how much it’s up. We gave comp guidance because it’s the all important back-to-school season as you well know and we thought that comp guidance was appropriate at this point in time, but I’m not going to get into very detailed specifics regarding that.

We have obviously seen an increase in traffic. A lot of that in the fiscal month of August has come from the shift of the tax-free days in a number of states, a lot of states and traffic is up even beyond those tax-free shifts. So as we said, of the 11% comp store gain in the fiscal quarter only about 5% is attributable to that tax-free shift. So we’re seeing relatively healthy, certainly relative to the recent quarters in our at Shoe Carnival improvement in comparable store sales.

So we’re really happy with that 6% improvement that we’re seeing net of the tax-free shifts. However, we like everybody else are concerned with what happens to the consumer subsequent to that period of need or the period of want, that we all go back-to-school. So we’re not going to change the way that we plan our business in terms of expense structure.

We are changing a little bit, how we plan our business in terms of inventory and the selection and the depth of product. We have increased that for back-to-school and we anticipate keeping it increased if you will, all the way through the third quarter and into the fourth quarter and we’ve got the capability as you well know to react both from our promotional standpoint and from an inventory standpoint if we need to.

So again we’re going to continue to plan and execute the business from a conservative standpoint as we go forward.

David Turner - Avondale Partners

Cliff, interested in your comments about, I think in the Q-and-A you had mentioned that you feel like your company at least is in an athletic cycle, or at least this as athletic is fairly sustainable and this comes on the heels of some fairly negative results out of the mall based guys I understand different geographies, different consumer maybe, but I guess do you feel like there is a trade down effect?

I know Nike, you spent the last couple of years improving product in your stores would make sense that your athletic would improve, but is that, I guess is that, taking sales from one channel and putting them in another?

Cliff Sifford

I’m not convinced it’s trade up. I am convinced that it’s the ability to offer the customer that’s been walking in our door an opportunity to buy fashion athletic and that’s something that they’ve not had an opportunity to do over the past several years. So I don’t know that it’s so much a trade down effect as it is that we are now able to please the customers welcome working, just better product.

Operator

Your next question comes from [Russ Solestrie – Unidentified Company].

Russ Solestrie – Unidentified Company

Three questions, one, the tax rate. I heard you say something about it, I know it’s abnormally high, but will that go down or is that what were you should figure going forward? Question one and then, also trying to get a sense of the inventories on a per square foot basis given where the store openings are from the end of July or to the end of the month now, because it looks like the inventories were up versus a year ago and it was sales being a little bit lower.

So I’m just trying to get a little bit more comfort on that. The last question, you talk about how people by for need and then they come back for what they want. I was wondering, if you could just elaborate on people have been asking, but what are the styles that people have been coming back for in terms of what they want from those states that have already been back-to-school for a significant period of time?

Kerry Jackson

Let me start with the tax rate. The Q2 taxes rate was unusually high. It was 47% in the Q2 tax rate last year was unusually low at 34%. Both of those quarters had, last year was a benefit.

This year was a detriment to stated tax, audits and other types of adjustments, period adjustments. Because it’s a low income quarter Q2 is, it kind of exacerbates the percentage differential on an annual basis we don’t expect a big difference. We expect our annual rate to be about 39% this year and it’s been approximately the same, our guidance has been the same all year.

Cliff Sifford

As far as inventories are concerned, total company inventories end of the July time period, relatively flat to last year. Even with the loss in sales, we received inventories in August relatively flat, because of the increase that we had in August. As far as what need are concerned.

A customer shops back-to-school for athletic product and that’s a need, but when they come in and by athletic product and boots they are in or Chuck Taylor’s as part of the athletic product. I think that’s that then moves into want.

Russ Solestrie – Unidentified Company

So you’re saying the Chuck Taylor brand is one of the strongest brands that you are seeing from…

Clif Sifford

We’re having a strong back-to-school with Converse Chucks, but there’s obviously been a period of time in some cases a multiple of weeks where people can now comeback and get what they want, because they don’t have it and it’s not necessarily cool what they already. So I was curious, what is it that the kids are buying, or the pans parents.

Mark Lemond

I think that’s what Cliff is saying is exactly that. Some of our hottest styles are coming from Nike and particularly in the running category and coming from Converse particularly the Chuck tailors, as well as some of the junior boots. That’s some of the hottest trends that we’re seeing right now along with junior flats, but women’s flats overall. Does that answer your question? I’m not sure we are getting to the answer. If you’ve got more specific question than that, please call us after the call.

Operator

Your next question comes from Sam Poser - Sterne, Agee.

Sam Poser - Sterne, Agee

Just clarify the inventory situation, there is just, the inventory is pretty much the same, but there’s just more inventory in the stores right now and there was more inventory in the distribution centers last year waiting to figure out where to go?

Mark Lemond

What we did, Sam, is as you well no we holdback a certain amount of our product for subsequent fill ins, replenishment and so forth. What we did was we put more inventories and more of that product into the store in anticipation of sales as opposed to last year of letting the sales happen and then replenishing the product, so we are out front a little bit more with the inventory at store level to the tune of about 6% increase.

Sam Poser - Sterne, Agee

Is that primarily due to the basically the how I guess back-to-school just became such a shortened season this year given the later back to school later events and all other things that it was sort of just out of absolute necessity to do that.

Mark Lemond

It’s a little bit of a change in strategy for us. Okay? What we are trying to do now is we think that we’ve gotten, that we have decreased store inventories to the point where we don’t need to decrease inventories any more. So we’re taking a little more proactive approach on putting inventory into our specifically into our stores but as you’ll probably see throughout the third and fourth quarter, we plan to increase inventories a certain amount.

Cliff is exactly right. With the increase in sales that we’ve seen so far in August, those inventories will ten to flat in out a little bit. As a result of the cost of sales from that increase in sales, but or intent is to not to continue to lower inventories. Our intent is to start to build inventories now with a broader assortment and a deeper product selection.

Sam Poser - Sterne, Agee

In the best categories?

Mark Lemond

Well, hopefully he buys the best categories.

Sam Poser - Sterne, Agee

I thought you sort of hint to this, I want to go back to store openings for a second, what is your sort of, if we look out ahead three to five years where, how many stores do you see, if we see call to normalization or getting back to you mean to some decent business looking into 2010 or beyond? How big a footprint do you see Shoe Carnival having over the next three to five years?

Mark Lemond

I don’t want to get into talking about 2011 and beyond. I’d rather focus on 2010 until we see better clarity with respect to this economy. If we see the economy start to pick up, which quite frankly I don’t see at this point in time, but when we do see that economy start to pick up then certainly we want to accelerate our store openings beyond that 15 to 20 year.

So, we’re focused right now on exactly like I said generating profit and cash flow in the short term, controlling our expenses and making sure that we have get appropriate inventory levels and content and doing business right now. As far as store development obviously there’s a lot of factors that go into that. Number one is availability of viable locations for 2010.

I will tell you that it has been cut back just by the very nature of the real estate industry right now, but we still think that there are 15 to 20 viable location that we can open in 2010 and 2011 and forward it starts to open up a little bit more with respect to real estate development, a little bit in terms of new strip center development but more so in terms of rehab of existing strip centers.

So, there is a lot of things that play into the amount of organic growth that we can have that real estate issue or the real estate piece of that, real estate factor is certainly one of those, but when we start to see a better economy we’ll focus more on opening more stores than we plan for 2010.

Operator

Your next question comes from Barry Sosnick - Gilford Securities.

Barry Sosnick - Gilford Securities

Just looking at the tables to the inventory and it actually decreased by about 9%, your stock to sales is in good position. Does this mean that you’re employing cash in owe to generate better buying terms?

Mark Lemond

We are not forcing purchase discounts if that’s what you’re asking. We’re taking advantage of certain opportunities in the marketplace from a close out standpoints when we can and when there are avail of opportunities certainly, but I don’t know, Kerry do you want to get any further answer than that? We’re not utilizing cash to generate extra discounts with our vendors and so forth, if I’m answering the question correctly?

Kerry Jackson

You are.

Operator

Your final question comes from Jeff Stein - Soleil Securities.

Jeff Stein - Soleil Securities

Just one additional question Mark, on the inventory, I mean just to be double fabricate, the advantage of holding inventory back in the warehouse and your distribution center is to replenish according to need, so you’re not taking unnecessary markdowns, if you shift to store.

So is the risk that perhaps you are talking the dies a little bit and if the sell through does happen you could incur higher markdowns or have you just reached the point of diminishing results where you just can’t push inventory levels down and you think you’re better off with a little more than less.

Mark Lemond

Jeff, it becomes certainly maybe a little bit of a role of the dies, remember it’s not that we’re putting a great deal of inventory into the stores that we haven’t already purchased. So I mean with our systems, what we are doing is making better predictions if you will of where that inventory is going to sell and when it’s going to sell, certainly in the back-to-school period relative to the tax-free days and the times that the schools go back.

So all we’ve really done is take inventory that we own anyway, it’s not like we’re going out and buying additional inventory to a great extent, but taking inventory that we own already in our distribution center and saying, “Okay, we know we’re going to have tax-free sales in certain stores.”

We know where and when schools are going to go back, let’s be better predictors of business than we have been in the past and put that inventory to work as quickly as we can and certainly, Cliff and his team made the right call this year because now that inventory is available to consumer approximately two weeks earlier than what it would have been last year.

So it’s not really a role of the dies if you will. It’s utilize our systems better and as you well know, we put a lot of money into those merchandising systems over the past few years. So we’ve utilized those systems to be better predictors of business and where that business is going to happen, and when it’s going to happen.

So that’s how we look at it, not as if it’s such a guess or a role of the dies or taking much jeopardy with respect to markdowns. We really don’t see it that way. What we’re focused on is having more products with a broader selection and deeper inventory runs in stuff that we’ve already bought in the first place, if you see what I’m saying.

Jeff Stein - Soleil Securities

Your inventories at the end of the quarter on a per store basis were flat?

Mark Lemond

They were up 0.3%. I believe is the correct number. Now don’t forget that costs of sales from those tax-free shifts were reflected in that inventory on a per store basis at the end of Q2. So a good piece of those, well that cost of sales shifted into Q3. So we have that inventory on hand at the end of Q2. Without that our inventories on an overall per store basis would have been slightly down.

The point I’m trying to make is with respect to the third and fourth quarter, certainly we can react in a small way, but we can’t react in a huge way to bring in inventories other than fill in product in the third quarter due to the increase in sales that we’ve recognized so far or realized so far.

So what we’re looking at with respect to increasing our inventories is more in the fourth quarter and first quarter of next year and don’t misunderstand. We’re not jumping out there and increasing our inventories in a significant way we’re talking about. Let’s make sure that we’re not focused on cutting our inventories the way we have over the past couple of years.

Operator

We have no further questions at this time. I’d like to turn the conference back over to Mark Lemond for any closing remarks.

Mark Lemond

Thank you and thank you all for joining us today. Like we said, we’re enjoying pretty good success with the back-to-school season so far. Again we don’t have great clarity with what happens after with the consumer after back-to-school, but we think with the position that we’ve put Shoe Carnival in, we’re fairly optimistic with respect to the remainder of the third quarter and the rest of the fiscal year. Thank you for joining us today.

Operator

Once again this does conclude today’s conference call. We appreciate your participation.

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Source: Shoe Carnival Inc.Q2 2009 Earnings Call Transcript
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